Primer on Bitcoin Taxation

1. Once you mix your coins the value of a coin from your perspective becomes the average cost of a coin. So if you paid $1 for a coin and $100 for another coin, put both into something that made the distinction impossible, and then sold a coin for $150, you would have to pay taxes on $150 - ($100 + $1)/2 or $99.5 of income.

Note that turning into non-Bitcoin is the event, type of Bitcoin does not matter, but anything but a Bitcoin does.

2. Technically you would have an income on your gains of xxx-w%. I don't know offhand if you could write off the expense, but I doubt it.

3. You are talking about bitcoins being bitcoins, so no taxable event. Whether it counts as an expense for writing off purposes is another point I don't know. This would likely be a loss so could be deducted.

Your edit: Assuming you account for the value of the bitcoins gained at the time you gained them as income (which you should have) then you can consider that as the cost of the bitcoins. If you never counted the value of the bitcoins when you gained them then your cost basis is $0, so the entire value of the cash out is income. There may also be penalties involved in that but they likely won't care for small amounts of original value.

If a = y coins sold and b = z coins sold, then gain should be...

=[sales price allocable to a coins - purchase purchase allocable to a coins] + [sales price allocable to b coins - purchase purchase allocable to b coins]

=[[a/w * w sales price - [a/y* y purchase price]] + [b/w * w sales price - [b/z* z purchase price]

2) It should be possible to add the cost of the cracker into the "cost basis" of the xxx-w coins, which should affect the amount of taxable gain on a later sale of some or all of those coins. However, there should not be any immediate or current year tax implications.

3) There are some write-offs for lost or stolen goods. Don't know how applicable they would be to digital goods like Bitcoin since nobody has actually gotten to that point yet! It's not really been established whether digital goods can be "lost" for tax purposes. If analogizing the tangible property, its likely that a court would eventually say they can be lost and thus written-off, but no courts actually gone out and said it...yet. (There have been cases dealing with this on non-tax grounds.) However, in this situation, the tax from #1 is still there, at best there could be a deduction for the losses incurred in #3.

Proving length of ownership is necessary for all capital goods for which the taxpayer hopes to qualify for capital gains rates in the face of an audit. However, audits are retrospective--you don't need IRS permission to claim capital gains rates on your return. You simply need to have supporting documentation to defeat an audit if the IRS audits your return and challenges to applicability of the capital gains rates.

I refer only to wallets held on exchanges above because wallets held privately or in the US generally don't incur compliance obligations under the FBAR (foreign bank accounts) or FATCA (foreign financial assets) information reporting regimes. Specifically, the issue is that the FBAR and FATCA reporting regimes apply to accounts held in foreign financial institutions. Any business that holds financial assets for others is considered a financial institution, so any exchange offering bitcoin wallet services should be a financial institution under these laws. Because all of the major bitcoin exchanges are foreign, FBAR and FATCA reporting becomes an issue for U.S. taxpayers. The threshold for having a FBAR reporting obligation is $10,000, and for FATCA is $50,000. In both cases, the value of foreign accounts or assets is translated to USD.

Note also that financial institutions are actually defined somewhat differently for FBAR vs FATCA contexts. Bitcoin payment processors appear to be financial institutions in the FBAR context, but not in the FATCA context. However, all of the major payment processors are US-based, so FBAR and FATCA don't apply. Generally, U.S. tax law doesn't require you to disclose your domestic assets (the income is what matters.)

A FBAR reporting requirement means that next year you would need to file a Form TD-F 90.22-1, electronically, by June 30th. The form itself is for the most part simple and self-explanatory.

As for the Coinbase coins, for the most part, "foreign" in "foreign currency" means issued by a foreign government. The government generally refers to Bitcoin and other digital currencies as "virtual" currencies.

EDIT: Followup. FATCA, the other foreign reporting requirement, only kicks in if the value of total foreign financial assets exceeds $50,000 at the end of the taxable year. If total foreign financial assets aren't worth $50,000 at the end of the year, FATCA shouldn't apply.

If Mr. Robbins hadn't blown his gasket, I would have suggested contacting him. Unfortunately, I've since reviewed his LinkedIn profile and I can't in good conscience recommend an advisor who has been practicing for less than a year, has no tax background (LL.M, prior accounting employment, or even just experience from time spent in practice), and has demonstrated poor judgment in an online board linked to his real-life profile. Bitcoin taxation isn't a settled issue; most of the concepts are extensions and analogizations from other areas of tax law which can't be fully understood in only a few months of professional practice.

My recommendation: if you're on the West Coast, reach out to Loyola Law School's LL.M program and ask them to recommend an alum; if you're on the East Coast, reach out to NYU or UMiami's LL.M programs. LL.M programs are usually very good at helping connect prospective clients to their alumni.

Finally, while we're on the subject of contact info... I can't help but notice that you appear to be employed by an accounting firm. I've actually done business with your firm, and I don't think they would appreciate one of their associates publishing an online tax article without first going through the internal review process and having it vetted. (You should re-read your employment contract, almost every law firm and accounting firm has something on this subject in there.) Moreover, you may want to expand upon your Circular 230 warning and the legal advisory notice at the start of the article, since both are inadequate. Finally, you really should change every instance of would to should because your are implying a level of certainty that doesn't (and can't) yet exist about the tax treatment of Bitcoins. (This is why I used should and probably in my answers--I'm not offering a covered opinion, merely expressing the potential application of the current state of the law to the provided facts as I understand them.)

You weren't that hard to find on LinkedIn, and your behavior on this board reflects poorly on yourself and your firm.

That shouldn't really come as a surprise, given the way he went about it. Making an entire post using caps lock is usually frowned upon, to say the least, and, as has been pointed out, no such claims were ever made in the first place, it's perfectly clear that grandparent is referring to a completely separate article that's yet to even be published.

Also, Mr. Robbins has updated the article since I posted my comment, so generally all of the questions I have received would now be answered by his article.

As he should have been, replying in all caps while being unable to comprehend what gamblor956 wrote. gamblor956 did not imply that he was the author of the article, rather the author of AN article on a related topic. Coming to hasty conclusions and calling out a friendly poster hardly speaks highly of the OP.

He should read more carefully in the future and not overreacted, I would be hesitant to trust such a personality, an attorney should know better.

For the most part, unless you've held the coins for longer than a calendar year, the income is short-term capital gains, or as it is frequently known to tax advisors, ordinary income with a special name.

Is it an issue of intent? If I exchange for investment purposes, it's taxed, but for practical purposes, it's not?

I've bought most of my bitcoins from Craigslist handing cash to local bitcoin sellers.

Many people use https://localbitcoins.com/

There are definitely at least a few ways to buy and sell bitcoin without leaving a paper trail.

This wouldn't work at all. If that happens, why wouldn't people switch to using Euros? Certainly there would be difficulties with convincing other people to take Euro, but if the cost of things decreased 20-30% because of no taxation on non-USD currency, people would switch.

The essence is that the IRS is going to invest in a lot of kneecapping wrenches to get any sort of meaningful compliance from BTC users under the current system, as the only way to seize properly secured coin when the owner is unwilling is to somehow make him willing.

Thus, if you can't file your bitcoin taxes on a space smaller than a postcard, you're probably not going to get a lot of voluntary compliance, no matter how much people actually support paying taxes. Think about the use tax on interstate retail sales. Hardly anyone pays it because no one cares to tally up every Internet purchase they made, figure the amount of tax owed, and send it along when that information is not already available to the taxing authority.

There is no consequence to not doing it, and doing it correctly costs both a small amount of money and an enormous amount of time, which is arguably even more valuable.

There will always be some amount of non-compliance. In those instances, the IRS and DOJ pursue criminal charges (i.e., Wesley Snipes). For the most part, however, the IRS just wants to receive the taxes. If frequently offers amnesty to people who belatedly realize they owe back taxes (meaning, usually no penalties or criminal charges, but interest accumulation does does apply).

According to US tax law, any accession to wealth is taxable when the gain is realized (yes, there are exceptions to timing and basis). So, if you mined a BTC and spent $1 doing it, then used that 1 BTC to purchase some LTC when the value of the BTC was $100, you gained $99 at the time you traded it for LTC. That gain is realized at the time of the exchange and taxable at that time.

For example, a classic approach is simply to assign you a flat tax amount per year, and periodically visit you to check "how you're living" to reassess how much you'll have to pay.

It's generally worse than the current approach (less accurate, even more prone to corruption), but it works sufficiently well, and would work even in bitcoin-only world.

that's what I'm talking about dummy.